More...

Credit ratings agency Standard & Poor's estimates that in the next years Japan will need an extra $8trillion of borrowing.

This tsunami of red ink places the financing problems of Greece, Portugal and Spain in perspective.

Yet despite this titanic inheritance, which makes Britain's prospective debt burden of 80 per cent of output look modest, Japan is not generally considered an economic basket case.

At 'AA' Japan's credit rating has fallen well below the coveted 'AAA' level still enjoyed by Britain and the US. There is some danger that without new steps to stem borrowing, Japan's rating could fall a notch further to 'AA-' adding to the already enormous interest rate cost of servicing its debt.

Clearly, the Japanese currency - the yen - is wobbling. Only last week it came under pressure against the US dollar with the rate slipping from 88 yen to 89 yen. Some forecasters predict a 100-yen-to-the-dollar rate as America's recovery starts to outstrip that of the land of the rising sun. A number of hedge funds are already speculating on this outcome.

Among the key reasons Japan has been able to absorb the punishment over the past decade or so is because it is a nation of savers.

Britain and the US generally rely on foreigners to help finance our deficits. Overseas institutions have been big buyers of gilts and US Treasury bills.

Indeed, the accumulated trade surpluses of Japan and its near neighbour and rival China are largely held in US government securities. That is why Washington painlessly runs simultaneous large balance of payments and domestic deficits - twin mountains of debt - with the markets turning a blind eye.

Japan does things differently. The larger volume of Japanese Government Bonds (JGBs) are held domestically by ordinary savers and the banks. In much the same way as the British banks will be encouraged to buy gilt-edged stock in the next few years as a means of holding less risky capital, so the Japanese banks have been required to hold bigger proportions of JGBs in the wake of its banking crisis at the end of the 1990s.

In the recent past no one worried too much about Japanese domestic debt because of the nation's vibrant export surpluses and profits repatriated by Japanese warrior companies such as the car-makers. But the reality is that those surpluses are ring-fenced. If Japan were to start selling down its dollar holdings all it would do is weaken the greenback and the value of its own investments.

Selling its US Treasury securities to pay down domestic debt would be a bit like selling long-held shares, in a falling market, to meet mortgage payments.

For years no one worried because of Japan's exceptional savings rate. The government could issue as much debt as it wanted in the safe knowledge that the population would buy bonds rather than dash down to the famed glitzy, Ginza shopping area.

That is no longer the case. Falling real incomes has meant that the personal savings rate has turned negative. It is now the banks and financial institutions that are holding up the JGB market.

Japan may have emerged from the 'great recession' faster and more robustly that some of its competitors. But that also means the nation needs to start facing up to its fiscal crisis at an early date if it wants to avoid sinking beneath waves of debt.